May 4, 2012

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May 4, 2012

On May 3, the Treasury Department announced (via blog post) its intentions with regard to the 343 banks that remain in the TARP Capital Purchase Program. Specifically, Treasury identified three approaches: (1) allow repayments over the next 12-18 months; (2) limited restructurings in the context of mergers or capital raises; and (3) auctioned sales of the TARP securities, either for individual banks or in pools. These intentions are flexible and sufficiently vague to allow Treasury to moderate from these plans, particularly if political pressures necessitate. However, they also provide a road map (at least a current road map) of the path that Treasury anticipates using.

Treasury invested a total of $245 billion under the TARP bank programs, and has already recovered $264 billion through repayments and other income. This represents a $19 billion positive return, without providing any value to the remaining investments. Every additional dollar recovered is an additional return for the US taxpayers.

Of the 364 remaining investments, Treasury notes that most are smaller, community banks. Treasury is careful to point out that these banks have just as much desire to repay TARP, but have generally found it harder to raise funds from private investors in the capital markets and have often been particularly hard hit by troubled real estate loans.

Notably, Treasury now indicates that it intends to continue to hold the TARP securities of those banks that Treasury believes will have the ability to repay over the next 12 to 18 months. This could suggest that those banks that Treasury believes could obtain regulatory approval to repay will not be provided the opportunity, at least in the short term, to participate in a public auction (and therefore repurchase their securities at a discount to par value). The Treasury also indicates that they will communicate “regularly” with the group of banks that they think can repay over the next 12 to 18 months and will share with them Treasury’s “expectations” for repayment. Treasury has expressly indicated that its expectations regarding which banks will be able to repay may change over time.

Treasury acknowledges that the majority of the remaining banks will not be in position to repay within the next 12 to 18 months … or in the foreseeable future. For these institutions, Treasury is focused on restructuring or selling the TARP investment.

Treasury will continue to accept proposals, typically in connection with mergers or plans to raise capital, to restructure its investment; “but only if the terms represent the best deal for taxpayers under the circumstances.” Treasury indicates that it has approved 20 of these restructurings, and anticipates continuing to do so “in limited cases.”

When looking to sell its TARP investment, Treasury indicates that it will continue to use the auction process. Treasury indicates that the results of the first six auctions were in line with what the Treasury had estimated. However, the Treasury also indicates that they will only sell above a pre-set reserve price in order to best protect taxpayer value. Future auction sales will include individual investments as well as pooled securities, conducted over time in stages. Treasury notes that it will continue to evaluate its strategies as it proceeds.

Although may of the same reasons may exist for the Treasury to desire to exit TARP’s Community Development Capital Initiative (CDCI), the Treasury specifically indicates that Treasury currently intends to continue to hold onto its CDCI investments and make disposition decisions regarding that program at a later date.